What Does a Small “R” Recession Mean For You?

September 8, 2015

It is official, according to the media: Canada is in “technical” recession. But the qualifier is telling and raises the question of whether the economic picture is, in reality, as negative as the term recession implies.

A technical recession refers to at least two consecutive quarters of falling economic growth, as measured by a country’s gross domestic product (GDP)—the total value of goods produced and services provided.

We continue to advise MD clients to focus first on their investing purpose and the associated time horizon. For investors with shorter time horizons, MD portfolios are designed to protect in the type of environment experienced recently.

Figures released on September 1, 2015 show Canada’s real GDP contracted at an annual pace of 0.5% in the second quarter of this year. This followed a decline of 0.8% in the first quarter—hence the label technical recession.

So what does a small “r” recession mean for you? In terms of your MD investments, and therefore your long-term financial well-being, not a great deal. This is largely because the label “technical recession” does not provide the full picture on Canada’s economic wellbeing or outlook. In short, the widespread adoption of this moniker in recent times will not impact your portfolio in the long-term.

We continue to advise MD clients to focus first on their investing purpose and the associated time horizon. For investors with shorter time horizons, MD portfolios are designed to protect in the type of environment experienced recently.

Canada’s Economic Outlook

To put things into wider perspective, the latest GDP figures are directly in line with the Bank of Canada’s projections. They are also better than expected by many financial market participants who were bracing for a far greater slowdown given the recent downturn within the energy sector—a large component of Canada’s economy. Moreover, in terms of monthly GDP figures, Canada’s real GDP rose 0.5% in June, after falling for five consecutive months, according to Statistics Canada. The increase in June was broad based, led by mining, quarrying, and oil and gas extraction and, to a lesser extent, wholesale trade, the finance and insurance sector as well as arts and entertainment.

The Bank of Canada (BoC) estimates that economic growth in Canada could average just over 1 per cent in 2015 and about 2 1/2 per cent in 2016 and 2017, indicating that the country is likely to have one of the fastest-growing developed economies in coming years. The BoC anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.

More immediately, the BoC expects growth to resume in the third quarter of 2015 and begin to exceed potential again in the fourth quarter, led by the non-resource sectors of Canada’s economy.

Canada’s Outlook by the Numbers

  • House price inflation, through July, remained at 5.1% and a rebound in home sales-to-new listings suggests that further gains are possible.
  • Employment in Canada increased by 6,600 in July with the jobless rate remaining at 6.8%. It is worth noting that the gain was fully supported by an increase in workers claiming self-employment which may not be sustained.
  • Canada’s trade deficit fell in June to $0.5 billion. The previous shortfall was $3.4 billion in May, but the recovery had a lot to do with a continued increase in oil prices (which has since reversed) and weaker imports (reflecting underlying weakness in domestic demand).

Summary

A technical recession is simply a label to describe at least two consecutive quarters of falling GDP growth. The impact of this development alone on your portfolio over the long-term is negligible. MD’s portfolio approach takes into account various economic cycles and developments. We tactically reposition our portfolios to take advantage of shorter-term opportunities.

We recommend that clients keep sight of their financial goals within each time horizon and ultimately maintain a long-term strategy. We encourage you to speak with your MD Advisor if you have any questions. Your MD Advisor can work with you to ensure your portfolio is diversified and well positioned to withstand market volatility.

Is there a Link between Economic Conditions and the Stock Market?

MD Portfolio Manager Ian Taylor examines the issue:

There is a limited direct relationship between short-term economic growth and capital market outcomes; however, recent influences on Canada’s economic growth have also hindered domestic stock-market performance.

Chiefly, the sharp fall in oil prices over the last 12 months has negatively impacted Canada’s growth and inflation expectations, as well as soured the view of some investors on the long-term earnings prospects for Canada’s stock market, in particular the Energy sector.

More recently, Canada’s stock market has been influenced by events globally as investors reacted negatively to increasing uncertainty regarding economic growth in China. These events were not Canada-centric but had a material impact on stock markets in Canada and globally.

In differentiating between short-term outcomes and long-term expectations, it is important to look beyond volatility in stock and commodity prices to try and capture the big picture.

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